Can FBAR Penalties be Assessed on Non-Residents
The FBAR refers to Foreign Bank and Financial Account Reporting. There are various categories of US persons who are required to file the FBAR (aka FinCEN Form 114), including US person individuals, US entities, and US trusts/estates. In general, a non-resident alien is not required to file the FBAR. But, when a non-resident alien becomes a US person by either meeting the Substantial Presence Test or temporarily having lawful permanent resident status — the issues become much more complex. More specifically, what happens if a person was previously a US person and then is no longer a US person but has been assessed penalties by the Internal Revenue Service for not properly filing the FBAR for the time-period in which they were a US Person? Let’s take a look at a common example.
David is an NRA Who Meets SPT
David is a foreign national non-resident alien. For the majority of his life, he resided outside of the United States, but recently began working in the United States on a visa and now resides in the United States for the majority of the year. Since David resides in the United States for the majority of the year, he met the substantial presence test. By meeting the substantial presence test, David is now a resident alien and subject to US tax on his worldwide income as well as having to report FBAR. David sporadically files the FBAR, but either incorrectly reports his foreign accounts — or fails to report certain accounts timely and/or accurately.
David’s Foreign Bank Requests a W-9
Once David relocated to the United States, he updated his Foreign Financial Institution (FFI) about his new US residency and the foreign bank then requested that David complete a W-9 instead of a W8 BEN — the former which signifies that David is a US person. Since David’s bank complies with FATCA (Foreign Account Tax Compliance Act), the foreign bank sent David’s account information to the US government as is the FFI’s pattern and practice for the foreign financial institution.
David Relocates Back to his Home Country
After five years in the United States, David relocated back to his home country and is no longer considered a US person because he does not meet the substantial presence test.
David is Audited for Prior Years
Despite the fact that David has relocated back to his home country, the IRS audited him for his prior-year noncompliance, and the examination resulted in penalties for Form 8938 and FBAR noncompliance.
But David is No Longer a US Person?
That is correct, David is no longer a US person. But, at the time that David was residing in the United States, he was a US person. Therefore, David can still be audited for his tax return for those prior years as long as it is within the examination statutory period — which currently it is. Therefore, despite the fact that David is no longer a US person, he can still be audited and assessed FBAR penalties for the years that he was a US person and did not meet the filing requirements — despite the fact that he is no longer a US person.
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